Value Added Tax – Pros and Cons

Value-Added Tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. Around 160 countries have already implemented VAT and UAE is the latest country to join the list from 1st January 2018.

The VAT has become highly popular as it raises revenue in a transparent manner and the general feeling is that VAT is the most effective instrument for generating government revenue.
Inevitable questions always arise like: What are the general impacts of VAT? Is VAT going to be beneficial or is it bad?

Let us understand.

Advantages of Value Added Tax

  1. Uniform rates are applicable to goods in the tax system.
  2. VAT is levied at successive stages of production and distribution of goods and services.
  3. It is collected at each stage of sale of goods and as such the interim business does not need to pay the whole VAT amount.
  4. VAT alleviates the cascading effect and as such related economic distortions.
  5. Value Added Tax introduces fairness and uniformity in the process of taxation.
  6. VAT ensures better tax compliance and reduces chances of tax evasion.
  7. Transparency in transactions is encouraged by VAT.

Disadvantages of Value Added Tax

  1. VAT’s are hugely regressive, with the highest impact mostly on the poor.
  2. Implementation of VAT has an administrative burden on the businesses.
  3. VAT could hamper the appeal of goods and services to customers who are not yet registered.
  4. To implement the VAT successfully, governments need to be alert and active.

 

Furthermore, VAT also has its own positives and negatives. But the most noteworthy point is that it will generate government revenue
and also help businesses in maintaining transparent books of accounts and provide true and clear picture to the general public.

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About the author

FAME is a leading Accountancy training provider. FAME brings together under one roof a wide range of accounting courses blended with real world experience and practical application. FAME aims to bridge the gap between theoretical knowledge and practical challenges that accountants face in their day to day working. We provide practical workplace skills for finance staff meeting the needs of employers, bankers, government and learners, both now and in the future. Our students are integral to the success of an organisation and at the heart of ensuring the smooth running of an accounting department.